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The Phillips curve equation can be derived from the (short-run) Lucas aggregate supply function. The Lucas approach is very different from that of the traditional view. Instead of starting with empirical data, he started with a classical economic model following very simple economic principles. Start with the aggregate supply function:
The Phillips curve appeared to reflect a clear, inverse relationship between inflation and output. The curve broke down in the 1970s as economies suffered simultaneous economic stagnation and inflation known as stagflation. The empirical implosion of the Phillips curve followed attacks mounted on theoretical grounds by Friedman and Edmund ...
"Demand-pull inflation" refers to the effects of falling unemployment rates (rising real gross domestic product) in the Phillips curve model, while the other two factors lead to shifts in the Phillips curve. The built-in inflation originates from either persistent demand-pull or large cost-push (supply-shock) inflation in the past.
The Famous 'Phillips Curve' to Predict Inflation Isn't Working Like It Should
William Phillips, an economist and creator of the Phillips curve, invented the MONIAC, a hydraulic computer which simulated the British economy. [3] [4] [5] This is the inspiration for the term. Even earlier, in 1891, Irving Fisher built a hydraulic machine for calculating equilibrium prices. [6]
Changes in the inflation level may be the result of several factors. Too much aggregate demand in the economy will cause an overheating, raising inflation rates via the Phillips curve because of a tight labor market leading to large wage increases which will be transmitted to increases in the price of the products of employers. Too little ...
Phillips first demonstrated the machine to leading economists at the London School of Economics (LSE), of which Phillips was a student, in 1949. It was very well received and Phillips was soon offered a teaching position at the LSE. The machine had been designed as a teaching aid but was also discovered to be an effective economic simulator. [3]
Phillips was born at Te Rehunga near Dannevirke, New Zealand, to Harold Housego Phillips, a dairy farmer, and his wife, Edith Webber, a schoolteacher and postmistress. [1] A mechanical aptitude began to emerge at an early age: at fifteen, Bill learned how to fix a motor vehicle engine, how to wire a shed for electrical lighting, build radios, and create a crude form of cinematography.